tv Best Of Bloomberg Markets Middle East Bloomberg April 7, 2017 7:00pm-8:01pm EDT
yousef: welcome to the best of "bloomberg markets: middle east ." the major stories driving headlines. the proposed merger between the national bank of abu dhabi, looking like it will cost twice as much as expected. south africa warned further downgrades could be on the way. moody's said it is reviewing the situation. driven by the
potential expansion of opec curbs. the secretary-general says he is cautiouslylly -- optimistic the market is rebalancing. met the kingister on wednesday. we got this take. devaluation issue is the most important in my mind. saudi want an ipo, 5% of the company, is to create the reality of the reserves. when we found this valuation if those valuations cannot be improved, that will delay the ipo in my mind.
it will not be hitting one of the main objectives of why the saudi government is doing that. the other thing is, how the interest has rising -- been rising in the saudi market, that is a benefit not felt in terms of market people putting money. now we see international investors, big investment banks. this is -- yousef: that usually has an effect on surrounding market spirit by virtue of size and scale. i pulled up technical indicators for the dubai market. it has done some interesting things over the last few trading sessions. i put three moving averages in there. you can see that here in the last one, it has broken through some of these as well. when you try to find your zoom function. what i'm trying to point out is you've got this convergence of
these three lines. what is your read on the the by market from a technical perspective? weak month. a , we saw somees pressure on the prices. sinceginning of april, sunday, positive moves on the leading stocks. this is in advance of these expectations. now turninge see it the tide. then we can talk about going into a bullish move. reversing the losses we had in march. >> how do you feel about banks? we see customers depositing in the uae banking system, expanding in the last few
months. is this sustainable trend? how long will this mobilization accelerate? >> i think it is important indicator because after the slowdowns and we have seen on the liquidity in the banks in the second half of 2016, this improvement could be telling us we are bottoming out. this is mainly driven or helped by the increased average of oil prices which started toward it the end of the year. with expectations for 2017, to be in the range of 52-55. that deflection is what we see now in the banking sector. this increase in liquidity is important. if this continues, that means banks are going to be more aggressive in lending, which
will help to turn the cycle, economic cycle on the upward again after the slowdown of 2016. y: is this a positive improvement for liquidity situations in the region? >> of course, of course. i think saudi, if it turns around positively, that will help with positive sentiment across the market. we have seen less talk about the devaluation of the currency. that is now removed. people are concentrating on the positive side, businesses been able to show positive growth compared to the slowdowns of 2016. the efficiency is the lowering of costs, it has taken place. we have seen most of it behind
us. going forward, we should be hearing about more aggressive growth stories rather than cost-cutting stories. as you listen to jamie dimon, something is clearly wrong. you are telling me the same thing, moments ago. you are like, look at the data and numbers. when it comes to the numbers. >> i have seen some of the extracts of what he said. i think really, what he is trying to say mainly, we cannot talk about a booming u.s. .conomy t why aren't we going higher than that? some of the data about weakening in car sales, which is a big factor sometimes related to the s&p performance, you see the consumer, u.s. consumer overstressed in terms of credit now that we have stretched in too much -- him too much.
the other thing i think you talked about, he prepared some of the people for a hard brexit. they are talking about moving people there to a place like ireland. talking about the economy, nt banking, they are going to be changes in the next two years which is trying to prepare people for. yousef: coming up come the leaders of the two biggest economies to talk trade. -- coming up, the leaders of the two biggest economies meet to talk trade. this is bloomberg. ♪
marketd how emerging currencies could be affected. >> the number one topic for discussion is north korea. regards trade. how much discussion and disagreement there will be. since trump has been president, there was a lot of talk about trade protectionism against china and asia. besides tpp, it has been conspicuously absent. is this going to be the meeting where the white house starts to shift its focus to china and asia >> -- asia on protectionism? it is a risk. yousef: that is the question, whether the status quo will be maintained or whether they will be a tangible shift in policy.
which one would you put your money on and why? >> i think ultimately, if you believe trump is very passionate about wanting to reduce the u.s. trade deficit and bring back manufacturing jobs to the u.s., he really can't just focus on mexico. the trade deficit with mexico is not that big. the big fish to fry are really more and asia. the trade deficit with china is more than six times bad with mexico. ultimately, i think there is tradeto be a shift toward restrictions with asia. the timing is very hard to pin down. is it going to be now or maybe when u.s. growth starts to tail off again? it is tough to tell. there is certainly this week, the risk is rising. this could be an important kind
of event that shifts the focus. what areickly tell us the most exposed asian currencies right now. we are seeing the taiwan dollar and the korean current strength -- korean currency strengthening. report on who is ultimately most exposed to u.s. exports. it is more tricky than you think. now has so much value added to, especially in places like mexico and china. what you need to do is disentangle the value added. in mexico's exports, china's exports, and reassign it back to the original source countries. once you take account direct exports to the u.s.. the other thing you need to do is scale it by the source country's gdp because that is giving you a much better metric of overall exposure. what you find is different
outcomes. outcomes, exitth go has the largest exposure. once you do adjustments, mexico slides down to number six. is out of the 10 most exposed countries, six of them are in asia. once you have done the work properly and taken into account the value added, especially countries like korea, taiwan, and malaysia that do a lot of value added, you find the real exposure to the u.s. is really in asia and countries as you mentioned. particularly northeast asia. pulled daybreak up again. one of the top stories. view.dimon+''s he points out, something is wrong very clearly. it is holding us back. this was pointed out in the gadfly article you can pull up. what he is citing is labor force
participation rate and infrastructure spending. he disagrees with the idea that slower growth and activity are a permanent feature of the u.s. economy. agree or disagree? moment,nk at the potential growth in the u.s. is going to stay week. -- weak. a lot of the policies trump is proposing to me are more short-term fixes in terms of getting growth stronger. it is not really helping the supply-side of the economy. you need education investment. investmentucation -- in research and development. i think the risk is, maybe demand runs ahead of supply and you could potentially see inflation picking up. the other thing, the survey data is stronger than the real activity data.
tracking estimates for q1 are below 2%. u.s., weso, in the can't help but wonder the risks coming from protectionism. if we do get these protectionist trends happening, which would be the region most shielded from it? >> it is very clear from the thee, it is -- second-most would be latin america, even though mexico's there. asia.ggest would be sed. is most expo \ second-most is latin america.
yousef: we have seen big moves on repricing. i have brought out the function, one of my favorite functions. concerns that the peso had gone too far. similar case for the ruble. on the downside, you have the turkish lira. how is this picture going to change? which one is likely to outperform here? >> the interesting thing, i think, so far this year, we have seen a lot of those countries, currencies that investors thought were very exposed to protectionism have done very well. mexico, the korean won. this meeting between trump and i, we could start to see weakness in mexico. even more so, the asian ones.
korea would stand out. taiwan, singapore. the singapore -- currencies that could held out relatively well, they are simply not that exposed to the u.s. protectionism. yousef: up next on the best of "bloomberg markets: middle east ," jacob zuma royals markets with a cabinet shakeup. the outlook for africa's biggest economy. ♪
credit ratings downgrade is something south africa has been trying to stave off. of course that effort really didn't go well with s&p downgrading. also putting out negative outlook, saying they feel the willffle will mean there be policy changes that lead to lower growth, which s&p currently does not project. we will also have to see how policy changes coming up -- come up following the downgrade. downgradeing that the reflects political decisions. what are the chances of resolution anytime soon? what does this mean for other credit ratings agencies?
>> we knew that moody's is expected to release its assessment later this week, possibly friday. there is anticipation among analysts they will follow suit as well. we know there is a lot of political uncertainty at the moment. as an zuma reshuffled his cabinet last week, firing the former finance minister. now we know the top anc strongly,came out criticizing and calling him to step down. these add to the political turmoil that ratings agencies have warned against. we expect ratings agencies will follow suit and possibly downgrade south africa's credit rating. shery: let's head back to our still the chief economist with us. thank you for sticking around.
we are talking about south africa and the rand and help took a hit. when it comes to emerging-market currencies, it owes has a lot to do with the u.s. dollar. you also have to look at treasury yields. we did have this monday rally in treasuries, but yields have been stuck at a level and have not really fallen that much. we are seeing them rebound in asian trading. what does this spell for the u.s. dollar and yields going forward? >> i think he yields are stuck in a range. globally, they have increased, particularly the last ex-nine months. as people recognize global economy is not about to tip over. now, there is a real test around the idea there is inflation system. because commodity crisis -- prices have come off a bit.
that inflationary impulses is washing through the system. as that comes out -- i think you will find bond yields stuck for quite a while. with maybe a bias for yields to be lower rather than hire. yousef: looking at 10 year yields, is the curve to insulting it should not be doing? the flattening of the yield curve, what is your interpretation of it? >> the curve should be a lot steeper. most standard indicators suggest it should be steeper. if you look at the fair forecast, what we talk about as the terminal rate, it should be steeper. the reality is it is not. sayets are continuing to the neutral interest rate, neutral rates in this environment, are much lower than give credit to.
shery: when we were talking about the u.s. economy, i can't help but see this to track economy. u.s. auto sales disappointed. when it comes to manufacturing numbers, they were pretty good. which do you take into account? especially as an investor? >> i don't think it is a two track economy. i think it is to track data. -- two track data. most of the hard data, while it has been ok, has not been anywhere near as robust as the survey data would suggest that is a bit of a puzzle. of course you follow the real data. if the gap has persisted for a while, it is almost certain the real you is giving you a guide.
yousef: we are seeing a collapse in demand in the u.s. when it comes to car purchases. that is undercutting the theory this consumer light is going to keep the u.s. economy on its eight and help it jump a notch up -- on its feet and help it jump a notch up. isi wonder if the auto piece about a shift in demand rather than a bias strike. the unemployment rate remains low, job growth is good, jobless claims are low. up,e wage growth is picking it is picking up from a decent rate, 2.5%. i think what you are seeing is a shift away from some purchases toward more services
tight consumption. that is a shift we are seeing in a number of countries in the global economy. . . yousef: next, egypt's did you know slow internet can actually hold your business back? say goodbye to slow downloads, slow backups, slow everything. comcast business offers blazing fast and reliable internet that's over 6 times faster than slow internet from the phone company. say hello to internet speeds up to 250 mbps. and add phone and tv for only $34.90 more a month. call today. comcast business. built for business. si'm happy for the distraction. i'll be right there. and the butchery begins. what am i gonna wear? this party is super fancy. are you my uber? [ horn honks ] hold on. [ upbeat music playing ] the biggest week in tv is back. [ doorbell rings ] who's that?
♪ this is the best of bloomberg markets: middle east. the pound exchange rate appreciating, but assuring the stronger currency would not affect improved competitiveness. we spoke to gary dugan at emirates. >> we are seeing foreign money come in. attractivetes look after the stabilization. a lot of foreign money came in and is looking up to pick up these high yields. that got exaggerated in
february, but if the currency remains at these levels, reserves built. d. yousef: how do you trade the egypt story? access points are in the money markets. that is where the juice has been in terms of the trade. >> where the juice has been in terms of the trade. >> consumer prices have been skyrocketing, and the central bank is not provided any details on its forecast when it comes to price pressures. >> it is difficult to put such a forecast given the massive depreciation we saw on the back end of last year. most economists are expecting that as that devaluation rolls off, we will see an improvement in that headline rate.
there is confidence in the way has been managed that will prompt further inflows of capital. shery: when it comes to the have seenrkets, we this rally in oil stocks last week. this sector has been a market underperformer since the start of the year. could we see some upside when it comes to the oil prices and the oil stocks because of that? >> yes, i don't think we need to in a remarkable improvement oil price for the energy sector to have some upside here. the trump trade had nothing to theith energy, but if improvement persists, i expect it to rally as much as 10%, particularly investors remain income seeking. yousef: i have pulled up this
function that shows fund flows for the middle east and africa. mixedn see the allocations outperformed, some weakness in real estate, commodities flat. how would you divide this up for the next six months? >> we have a fixed income bias. we have a positive view on equities, but everyone is waiting to take their money on that trade, so we are looking to buy bonds in a but not at these yields. swinging out of the equities after strong returns globally. could bethe market different because we have seen these markets go down against that long-term trend in global markets because of the weakness in the oil price. what about the mergers
and acquisitions story? we saw the first day of trade for first abu dhabi bank. >> this is still something that will play out. we still have relatively tight liquidity conditions. companies are looking to make costs at the cut government level, so that can only be done through mergers and acquisitions. chance of a u.s. recession, and the bloomberg survey is 15%. which side of the call are you on? >> 60% is because we have had this growth phase for so long, people can't keep buying cars, moving house, therefore economic recession, buto
yousef: welcome back to the "best of bloomberg markets: middle east." outlook on saudi arabia is supported by a strong fiscal position. we spoke to the head of middle east research at credit suisse for his take on the saudi economy. i know you have been covering saudi arabia closely on the back of this transformation story.
latest economic numbers are weaker than one would have thought, tying into a downbeat outlook for the kingdom. what is your read on it? >> everyone has been waiting for when saudi arabia's growth will on the oil side, and that will be a multiyear process. the transformation story, the reduction in expenditure. that has been fantastic. i think the growth story will remain weak until we see the non-oil side of the economy takeoff. what the credit rating agencies are pointing to are the execution risks. to put money to work in saudi arabia, you need to be able to say, i have faith in the government of the kingdom to execute on this program.
what is your health check on where they are right now? >> i am not expecting any major improvements. this is a story that takes time to get is years going. i would be looking to see they forlaying the foundation that non-oil economy to take off. it will not happen immediately. you want to see the groundwork being laid. they have been talking about how they want to build tourism in saudi arabia, which makes perfect sense. in order for that to work, you would need to see investment so peopleairports coming in can be process. i would like to see progress on tourism visas being issued. these are the steps i would be looking for to make sure that that foundation is being laid. >> one of the things that movies
mentioned as a possible gdp contraction because of oil prices and the opec agreement. we do have the bulk of that agreement falling on saudi arabia at a time when it needs rebuilding fiscal buffers. tothere a political will extend the agreement given saudi arabia's position? political will from saudi is very strong, but the question of opec as a whole, that is the , that this opec agreement is not hold together because you have members not sticking to the agreement. in terms of how saudi arabia squares the circle, we will continue seeing saudi arabia drawing down on its reserves. it does have a large buffer in that respect. they will be drawing down.
years, next couple of that will be the trend we see in saudi arabia. we have seen them control their expenditure, but that has not put an end to it. , we dosticking with opec have a growing expectation that we will get an extension of the production agreement. how effective will that be given that the first one has disappointed? >> i think the market may have put too much weight -- yousef: crude oil is down 6% in the first quarter. if you needed a report card, that is the first thing i would point out. >> fair enough. if you look at where oil has come back from and the fact it has held above this 50 mark come that is a good indicator that we have seen oil price expectations managed quite well. it is important we have this
extension stay in place because this supply imbalance has been a function of opec production cuts. yousef: let's cross over to egypt and talk about that story. we have the big meeting this week between trump and sisi. look at the egyptian treasury you-shapedlassic yield curve. uncommon, but still somewhat unique. what does that tell us about the egyptian economic recovery story? >> it is an interesting you curve. not only is it a pronounced u shape, but it is flat on either side. we suspect that what is driving that dip is a function of the ,ppetite for a certain maturity
especially foreign investors, and also the fact we have a yield curve that is heading upward being a proper sloping curve, and this is the first step towards that. i would expect to see the short end of the curve tighten. if you expect fx to be stable from which we think it is, then that is an attractive return to generate on a short-term basis. has comeout 21%, so it off a bit, but still elevated. tracy: we can't talk about bonds without talking about inflation. how big of an issue is that? >> it is a big issue. that is one reason why yields are so elevated in egypt.
that cannot be avoided. will have upward pressure on inflation. there has been an initial shoot up come but reflects there are subsidies in egypt which are non-sustainable, and that needs to be addressed over time. theone big risk is not political will to put the changes through, but inflation puts too much pressure on consumers and social unrest. the "bestming up on of bloomberg markets: middle ," we look at a recent sale. this is bloomberg. ♪
investor demand. we spoke to rizwan kanji at king & spalding. let's get your thoughts on the state of saudi aramco development, moves from larger corporate to tap the market. saudiis interesting, vision and the sovereign with a huge bond issuance. the saudi aramco issuance is a domestic play. being offered on a private placement basis to domestic financial institutions. aramcomoment, saudi being saudi aramco, there is sufficient demand for that paper domestically. it will be interesting to see what the international market sees.
yousef: what is the wider trend you identify, saudi aramco making that issuance. what other highlights are you seeing? >> the bond was an important one chipt a benchmark for blue government-related entities. it was important to set the benchmark for these entities to come to market. the saudi sovereign has announced it is going to market. that was a natural followthrough from a bond issuance. we are interested to see other government related entities cap the market now that the sovereign has opened the door. why hasn't it taken saudi arabia so long to issue sovereign sukuk? >> that is an interesting question. when this was being considered
, my money was on sukuk , saudi being a conservative islamic state. we were pleasantly or not surprised it was a conventional bond. aboutis a lot to be said the size and to set that benchmark pricing which allows the sukuk to come. why has it taken so long to issue debt? perhaps it did not need to until the oil prices and sovereign expenses -- that is critical in their analysis to why they tap the market. shery: when it comes to issuances in the broader golf market, what percent will be the
sukuk format compared to conventional ones? >> that is an interesting question. ,e saw kuwait tap the market and that was a conventional bond. they made no secret they will tap the market again with a sukuk. do you buy has had 14 sukuk issuances. in the region, we will see far greater sukuk issuances compared to bond, particularly for repeat issuances. and uae -- dubai have already issued and will tap the sukuk. there are that if it's of sukuk over bond. benefits benefits of sukuk
over bonds. yousef: this is a study. this is a study. we've added to key metrics here. we've crossed that with the bloomberg emerging market index. the take away here is the differential and spreads has been narrowing. it tells the story of two sides to the coin. opportunity and one is conventional bonds. how do you read these numbers? there is one key point from the numbers perspective. with a sukuk, your investor base there is one key point from the numbers perspective. with a sukuk, your investor base is wider. you are tapping the conventional and islamic investor. your investor base is wider and your demand is more there, and therefore it has an impact on
pricing. narrowing the cost of funding them up but there are more important geopolitical implications that have an impact as to why one would look at a sukuk over a bond. up,ef: in terms of opening they are doing that. what is your view on that? >> the size of the market and the capital they are looking to appetite, that is a natural course of action to further open markets. we have seen changes in the commercial corporate code which allows for investment in certain industries. i think the steps are being taken in that direction. like everything and saudi, it is a thought out, controlled, slow level of progress, but it needs
to get there. i think the level of change needs to be accelerated. shery: an interesting note from templeton and mobius backing that call, markets currently trading at 15% to 20% discount to historical you wish and's, so what is the expectation for you when it comes to equity valuations this year for gulf markets? be where wet will are currently seeing it. they will be flat if not lower in best case scenarios. it is a challenging capital market environment from the equity side, but i don't see any market, otherg to than the one widely talked about out of saudi arabia. yousef: that is it for "best of bloomberg markets: middle east." we will be here for the start of
♪ >> coming up on "bloomberg best" the stories that shaped the week around the world. face-off, in france in the u.s., tougher these are rules, and jamie dimon's letter to shareholders. >> the bank is preparing for a hard brexit. >> we will find a way to improve and increase our commercial relations. >> jack lew speaks his mind and another exclusive.